European Union in 2010

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Eleven years after the introduction of the euro in 11 member countries of the European Union, the entire venture was thrown into crisis in 2010 by a combination of national economic mismanagement and global instability. When the EU launched its single currency as a noncash monetary unit on Jan. 1, 1999, the grand idea was to bind those countries’ economies closer together while making it easier and cheaper for businesses to trade across national borders inside the “euro zone.” There also was a wider political goal. For those who had always wanted to fold Europe’s nation states into a full-blown political and economic union, the creation of one currency was an essential step along the road. In the intervening years the euro had replaced the local currency as the sole legal tender in 16 EU member countries, with another, Estonia, scheduled to join the euro zone on Jan. 1, 2011. Rather than serving as a continued spur to the goal of “ever-closer union,” of which its founders had dreamed, however, the euro’s structural weaknesses were exposed in 2010—when it became a point of vulnerability in the entire European venture—and its survival was called into question.

The year began with the Greek economy in crisis, struggling under spiraling debts and gripped by uncertainty about how to finance them. As the markets lost faith, they forced up interest charges on government bonds, adding to the dire financial position. Ireland also ran into difficulties, and near year’s end there were signs that Spain and Portugal could be heading the same way. (SeeSidebar.) In mid-November the problems for the euro remained so grave that the community’s first permanent president, Herman Van Rompuy of Belgium, publicly entertained the possibility that the euro and the EU could both collapse. “We all have to work together in order to survive with the euro zone,” he said. “Because if we don’t survive with the euro zone we will not survive with the European Union.”

On Dec. 1, 2009, the 27-country bloc celebrated the formal coming into force of the much-debated (and much-argued-over) Lisbon Treaty—a new miniconstitution that created the posts of permanent president and foreign policy chief and set the stage for the EU to have its own diplomatic service. The treaty also aimed to simplify the way decisions were made and to give the EU a sharper presence and clearer voice on the world stage. As the institutional overhaul took place, however, it was obscured by a more immediate and urgent problem—Greece. The Greeks, it turned out, had misled Brussels about the state of their national economy, but under pressure the alarming truth emerged. The country was found to be running a deficit of 15.4% of GDP and a debt ratio of 115%. Under the rules for euro-zone members, deficits were originally supposed to grow to no more than 3% of GDP and national debts to no more than 60%.

Greece’s problem was not just the existing burden of debt but also the fact that the markets were losing faith in the country’s ability to deal with that burden and were demanding higher interest rates to help it do so. The wider concern was that market doubts would spread to other weak euro-zone economies and that the entire currency area could be infected. Joaquín Almunia, the EU commissioner for economic and monetary affairs, proclaimed in February, “It is not the first time we have heard people saying that the euro is not going to work. For 10 years we have been able to show that economic and monetary union is a success.” Doubts remained, however.

Throughout the early part of the year, EU leaders worked on a plan to set up a rescue fund for euro-zone countries that found themselves in financial trouble. Germany initially resisted, and it was not until May that agreement was reached on the final details of a package totaling €750 billion (about $975 billion) to provide loans to EU countries in need. About one-third of that sum was guaranteed by the IMF. As part of the deal, a three-year bailout of €110 billion (about $140 billion) was announced to rescue Greece. Athens also would be required to make major austerity cuts that would involve “great sacrifices” by the Greek people, according to Prime Minister George Papandreou.

The EU’s already-battered morale was hit further when U.S. Pres. Barack Obama pulled out of an EU-U.S. meeting scheduled for May. U.S. officials had expressed frustration that the Lisbon Treaty, which was supposed to have made the EU a more effective operator on the world stage, had in fact created several posts for different officials who were all competing for Washington’s attention.

There was some good news in May after the U.K. general election left no single party with an overall majority. EU leaders had feared that a strong win for David Cameron’s Conservative Party would lead to the creation of a hard-line euroskeptic U.K. government. As it turned out, however, the Conservatives formed a coalition with the pro-EU Liberal Democrats, and it became clear that one of the Liberal Democrats’ conditions for joining the government was that the Conservatives drop their hard-line anti-EU stance. The first months of the coalition saw the U.K. engaging more enthusiastically with the EU than most EU diplomats had imagined possible.

In September relations between Brussels and the French government were damaged when EU Justice Commissioner Viviane Reding appeared to compare France’s action in deporting more than 1,000 members of the Roma (Gypsy) community from the country to the persecution of Jews in Nazi-occupied France. “This is a situation I had thought Europe would not have to witness again after the Second World War,” Reding said. “No member state can expect special treatment …when fundamental values and European laws are at stake.” French Pres. Nicolas Sarkozy hit back, condemning “the disgusting and shameful words that were used—World War II, the evocation of the Jews—was something that shocked us deeply.” Meanwhile, he vowed to continue France’s policy of dismantling Roma camps.

There was relatively slow progress toward the admission of new countries to add to the existing membership of 27; “enlargement fatigue” had beset the EU—particularly two of its founding members, France and Germany. Croatia’s accession discussions crept forward, and Serbia was kept on the road toward opening talks despite suspicions that it could do more to hunt down former Bosnian Serb military chief Ratko Mladic. Turkey’s membership negotiations made almost no progress, blocked by a dispute over that country’s refusal to open its ports to vessels from Cyprus.

By the end of the year, arguments were raging over proposals by the European Commission and European Parliament to raise the EU budget by 5.9% for 2011. Cameron, who had wanted the EU budget frozen because national governments were cutting back spending and he believed that the EU should do the same, won the support of 10 other countries for a maximum rise of 2.9%. In a joint statement the 11 countries said that they found the 5.9% demand “especially unacceptable” at a time when members were embarking on national austerity programs. The budget row showed how much the EU was on the defensive as individual members battled to sort out their own domestic problems. Even the Franco-German alliance—the motor of European integration—came down firmly against voting for the pay raise that others in the EU wanted.

By mid-November Ireland’s economic problems were preoccupying EU leaders, as Greece’s had done earlier. The Irish had enjoyed a massive economic boom in the 1990s, with GDP per capita almost doubling over the decade and a thriving economy that earned Ireland the nickname the “Celtic Tiger.” In recent years the bubble—which had been based to a large extent on soaring real estate prices—had burst spectacularly. Prices slumped, leaving many Irish people owing far more on the properties than they were worth. Ireland’s minister for European affairs, Dick Roche, accepted that Irish banks were having trouble raising enough cash with which to operate, but he stuck to the official line that the country did not need a bailout. With Ireland heading for a deficit of 32% of GDP—more than double that of Greece when it triggered fears about the euro—few expected the country to get through the rest of the year without a rescue package.

At the end of November, Dublin bowed to the inevitable. After intensive negotiations behind the scenes, EU finance ministers agreed to provide €85 billion (about $113 billion) in the form of loans to Ireland—€35 billion (about $47 billion) to help the banks and €50 billion (about $66 billion) to help the government manage spending while cutting its deficit. Prime Minister Brian Cowen, under heavy criticism at home for having led Ireland to the humiliating position where it had been compelled to go cap in hand to Brussels for help, described the bailout as “the best deal for Ireland.” Hopes that Ireland’s bailout would bring a sense of stability proved false, however, as rumours circulated that Portugal and Spain could be next to require help. The year ended with the euro-zone finance ministers agreeing to establish a European Stability Mechanism, a permanent mechanism to help resolve future euro-zone debt crises.